• Total net revenue interest (NRI) production averaged 27.4 MMcfe/d (Working Interest of 31.4 MMcfe/d) for the three months ended June 30, 2022.
  • Realized natural gas prices of $6.81/Mcf including hedges ($6.88/Mcf excluding hedges) for the three months ended June 30, 2022.
  • Total revenues of $19.9 million ($17.9 million from natural gas, oil, and NGL sales, $2.0 million from gathering and compression fees through our ownership in the Auburn Gas Gathering System)
  • Adjusted EBITDA of $15.6 million for the quarter
  • Net cash provided by operations of $8.1 million and $15.8 million for the three and six months ended June 30, 2022
  • Free cash flow (FCF) before changes in working capital of $9.5 million and $13.7 million for the three and six months ended June 30, 2022
  • Cash at quarter end of $30.9 million ($31.5 million including restricted cash).
  • For the quarter ended June 30, 2022, the Company returned a total of $6.1 million to shareholders – $4.6 million through the repurchase of 697,100 shares, representing a 3% reduction of outstanding shares as well as $1.5 million to shareholders through dividends.

Jason Stabell, CEO, commented, “The second quarter results reflect the strong back drop for commodity prices, particularly natural gas. Sequentially, revenues increased 46%, driven largely by an increase of 68% on realized natural gas prices. We remain largely unhedged with a pristine balance sheet (no debt) and robust liquidity including $30.9 million of cash and a $14.0 million undrawn line of credit.

During the quarter, we returned $6.1 million to our shareholders in dividends and buybacks. Through August 9, 2022, under our authorized NCIB, we have purchased 978,600 shares at an average cost of $6.35 of which 281,500 shares have been purchased since quarter end (avg. $5.88 per share). We have 204,810 shares remaining in our authorized NCIB.

I have been with the Company for only a short time, but I am very excited about the prospects ahead. We continue to maintain a lean organization focused on disciplined capital allocation. At current prices, we project our cash balances to continue to grow this year. For 2H22, we are well positioned to opportunistically invest in our project areas, purchase shares, and evaluate new opportunities.”

Financial and Operating Results

Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
Revenues
Natural gas revenue $ 15,984,348 $ 5,106,922 $ 26,687,432 $ 11,439,021
Volume (MMcf) 2,324 2,548 4,675 5,014
Avg. Price ($/Mcf) $ 6.88 $ 2.00 $ 5.71 $ 2.28
Oil and other liquids revenue $ 1,931,488 $ 131,832 $ 2,707,729 $ 238,888
Volume (MBO) 27.6 3.2 42.5 6.9
Avg. Price ($/Bbl) $ 69.92 $ 41.68 $ 63.73 $ 34.58
Gathering system revenue $ 1,987,168 $ 1,851,095 $ 4,107,941 $ 3,853,252
Total Revenues $ 19,903,004 $ 7,089,849 $ 33,503,102 $ 15,531,161
Total Daily Production, Mcfe/d 27.4 28.2 27.2 27.9

Capital Expenditures

Epsilon’s capital expenditures were $1.5 million for the three months ended June 30, 2022. This capital was mainly related to the drilling of three gross (0.03 net to EPSN) wells in Pennsylvania and the drilling of one gross (0.15 net to EPSN) and completion of one gross (0.11 net to EPSN) wells in Oklahoma.

Second Quarter Results

Epsilon generated revenues of $19.9 million for the three months ended June 30, 2022 compared to $7.1 million for the three months ended June 30, 2021.

Realized natural gas prices averaged $6.88/Mcf (excluding hedges) for Upstream operations in the second quarter of 2022. Operating expenses for Upstream operations in the second quarter were $2.6 million.

Epsilon reported a net after tax income of $10.6 million attributable to common shareholders or $0.45 per basic and $0.44 per diluted common share outstanding for the three months ended June 30, 2022, compared to net after tax loss of $0.5 million, and $0.02 per basic and diluted common share outstanding for the three months ended June 30, 2021.

For the three months ended June 30, 2022, Epsilon’s Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization (“Adjusted EBITDA”) was $15.6 million as compared to $3.0 million for the three months ended June 30, 2021.

The Auburn Gas Gathering System gathered and delivered 16.7 Bcf gross of natural gas during the quarter as compared to 18.3 Bcf during the first quarter of 2022. Primary gathering volumes decreased 2.4% quarter over quarter to 11.3 Bcf. Imported cross-flow volumes decreased 22.1% to 5.4 Bcf as a result of the normal decrease in gas demand following the peak winter season.

About Epsilon

Epsilon Energy Ltd. is a North American onshore natural gas production and midstream company with a current focus on the Marcellus Shale of Pennsylvania.

Forward-Looking Statements

Certain statements contained in this news release constitute forward looking statements. The use of any of the words “anticipate”, “continue”, “estimate”, “expect”, ‘may”, “will”, “project”, “should”, ‘believe”, and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Forward-looking statements are based on reasonable assumptions, but no assurance can be given that these expectations will prove to be correct and the forward-looking statements included in this news release should not be unduly relied upon.

The reserves and associated future net revenue information set forth in this news release are estimates only. In general, estimates of oil and natural gas reserves and the future net revenue therefrom are based upon a number of variable factors and assumptions, such as production rates, ultimate reserves recovery, timing and amount of capital expenditures, ability to transport production, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially from actual results. For those reasons, estimates of the oil and natural gas reserves attributable to any particular group of properties, as well as the classification of such reserves and estimates of future net revenues associated with such reserves prepared by different engineers (or by the same engineers at different times) may vary. The actual reserves of the Company may be greater or less than those calculated. In addition, the Company’s actual production, revenues, development and operating expenditures will vary from estimates thereof and such variations could be material.

Statements relating to “reserves” are deemed to be forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and can be profitably produced in the future. There is no assurance that forecast price and cost assumptions will be attained and variances could be material.

Proved reserves are those reserves which are most certain to be recovered. There is at least a 90% probability that the quantities actually recovered will equal or exceed the estimated proved reserves. Undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (for example, when compared to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable) to which they are assigned. Proved undeveloped reserves are those reserves that can be estimated with a high degree of certainty and are expected to be recovered from known accumulations where a significant expenditure is required to render them capable of production.

GLJ

The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties due to the effects of aggregation. The estimated future net revenues contained in this news release do not necessarily represent the fair market value of the Company’s reserves.

Contact Information:

281-670-0002

Jason Stabell
Chief Executive Officer
[email protected]

Andrew Williamson
Chief Financial Officer
[email protected]

Special note for news distribution in the United States
The securities described in the news release have not been registered under the United Stated Securities Act of 1933, as amended, (the “1933 Act”) or state securities laws. Any holder of these securities, by purchasing such securities, agrees for the benefit of Epsilon Energy Ltd. (the “Corporation”) that such securities may not be offered, sold, or otherwise transferred only (A) to the Corporation or its affiliates; (B) outside the United States in accordance with applicable state laws and either (1) Rule 144(as) under the 1933 Act or (2) Rule 144 under the 1933 Act, if applicable.

EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(All amounts stated in US$)

Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Revenues from contracts with customers:
Gas, oil, NGL, and condensate revenue $ 17,915,836 $ 5,238,754 $ 29,395,161 $ 11,677,909
Gas gathering and compression revenue 1,987,168 1,851,095 4,107,941 3,853,252
Total revenue 19,903,004 7,089,849 33,503,102 15,531,161
Operating costs and expenses:
Lease operating expenses 2,621,750 1,784,138 4,392,404 3,378,327
Gathering system operating expenses 171,495 173,547 330,706 364,494
Development geological and geophysical expenses 2,386 11,451 4,772 22,990
Depletion, depreciation, amortization, and accretion 1,803,739 1,646,094 3,192,958 3,328,954
Gain on sale of oil and gas properties (221,642 ) (221,642 )
General and administrative expenses:
Stock based compensation expense 194,050 236,041 336,352 438,540
Other general and administrative expenses 1,465,143 2,048,300 2,636,275 3,375,461
Total operating costs and expenses 6,036,921 5,899,571 10,671,825 10,908,766
Operating income 13,866,083 1,190,278 22,831,277 4,622,395
Other income (expense):
Interest income 21,945 8,904 37,166 16,717
Interest expense (745 ) (22,345 ) (16,064 ) (49,418 )
Gain (loss) on derivative contracts 776,994 (1,827,334 ) (194,910 ) (1,361,993 )
Other (expense) income (61,713 ) (279 ) (67,119 ) 1,663
Other income (expense), net 736,481 (1,841,054 ) (240,927 ) (1,393,031 )
Net income (loss) before income tax expense 14,602,564 (650,776 ) 22,590,350 3,229,364
Income tax expense (benefit) 4,019,576 (165,751 ) 6,201,474 978,822
NET INCOME (LOSS) $ 10,582,988 $ (485,025 ) $ 16,388,876 $ 2,250,542
Currency translation adjustments (19,150 ) 242 (13,748 ) (1,242 )
NET COMPREHENSIVE INCOME (LOSS) $ 10,563,838 $ (484,783 ) $ 16,375,128 $ 2,249,300
Net income (loss) per share, basic $ 0.45 $ (0.02 ) $ 0.69 $ 0.09
Net income (loss) per share, diluted $ 0.44 $ (0.02 ) $ 0.69 $ 0.09
Weighted average number of shares outstanding, basic 23,576,746 23,779,205 23,627,015 23,862,749
Weighted average number of shares outstanding, diluted 23,822,123 23,779,205 23,796,166 23,941,340

EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Balance Sheets
(All amounts stated in US$)

June 30, December 31,
2022
2021
ASSETS
Current assets
Cash and cash equivalents $ 30,945,605 $ 26,497,305
Accounts receivable 9,930,891 4,596,931
Fair value of derivatives 940,553
Other current assets 240,998 569,870
Total current assets 42,058,047 31,664,106
Non-current assets
Property and equipment:
Oil and gas properties, successful efforts method
Proved properties 145,697,537 138,032,413
Unproved properties 18,021,391 21,700,926
Accumulated depletion, depreciation, amortization and impairment (105,047,754 ) (102,480,972 )
Total oil and gas properties, net 58,671,174 57,252,367
Gathering system 42,566,495 42,475,086
Accumulated depletion, depreciation, amortization and impairment (33,995,327 ) (33,443,949 )
Total gathering system, net 8,571,168 9,031,137
Land 637,764 637,764
Buildings and other property and equipment, net 292,727 309,102
Total property and equipment, net 68,172,833 67,230,370
Other assets:
Restricted cash 569,407 568,118
Total non-current assets 68,742,240 67,798,488
Total assets $ 110,800,287 $ 99,462,594
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable trade $ 1,786,570 $ 1,189,905
Gathering fees payable 1,052,168 963,546
Royalties payable 2,471,969 1,853,508
Income taxes payable 2,410,790 1,098,425
Accrued capital expenditures 224,179 1,016,830
Other accrued liabilities 834,779 1,098,127
Fair value of derivatives 239,824
Asset retirement obligations 85,207
Total current liabilities 8,780,455 7,545,372
Non-current liabilities
Asset retirement obligations 2,735,965 2,748,449
Deferred income taxes 10,224,766 9,905,440
Total non-current liabilities 12,960,731 12,653,889
Total liabilities 21,741,186 20,199,261
Commitments and contingencies (Note 9)
Shareholders’ equity
Common shares, no par value, unlimited shares authorized and 23,356,453 issued and 23,082,353 outstanding at June 30, 2022 and 24,202,218 issued and 23,668,203 shares outstanding at December 31, 2021 127,093,520 131,815,739
Treasury shares, 274,100 at June 30, 2022 and 534,015 at December 31, 2021 (1,646,823 ) (2,423,007 )
Additional paid-in capital 9,171,555 8,835,203
Accumulated deficit (55,364,008 ) (68,783,207 )
Accumulated other comprehensive income 9,804,857 9,818,605
Total shareholders’ equity 89,059,101 79,263,333
Total liabilities and shareholders’ equity $ 110,800,287 $ 99,462,594

EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)

Six months ended June 30,
2022 2021
Cash flows from operating activities:
Net income $ 16,388,876 $ 2,250,542
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, amortization, and accretion 3,192,958 3,328,954
Loss on derivative contracts 194,910 1,361,993
Gain on sale of oil and gas properties (221,642 )
Settlement paid on derivative contracts (1,375,287 ) (27,460 )
Settlement of asset retirement obligation (118,259 ) (3,483 )
Stock-based compensation expense 336,352 438,540
Deferred income tax expense 319,326 230,863
Changes in assets and liabilities:
Accounts receivable (5,333,960 ) 388,912
Prepaid income taxes and other current assets 328,872 (12,476 )
Accounts payable, royalties payable and other accrued liabilities 738,023 77,248
Income taxes payable 1,312,365
Net cash provided by operating activities 15,762,534 8,033,633
Cash flows from investing activities:
Additions to unproved oil and gas properties (162,445 ) (70,058 )
Additions to proved oil and gas properties (4,935,370 ) (1,557,869 )
Additions to gathering system properties (82,855 ) (79,419 )
Additions to land, buildings and property and equipment (1,234 ) (5,745 )
Proceeds from sale of oil and gas properties 200,000
Prepaid drilling costs 273
Net cash used in investing activities (4,981,904 ) (1,712,818 )
Cash flows from financing activities:
Buyback of common shares (3,956,403 ) (1,061,468 )
Exercise of stock options 608,787
Dividends (2,969,677 )
Net cash used in financing activities (6,317,293 ) (1,061,468 )
Effect of currency rates on cash, cash equivalents and restricted cash (13,748 ) (1,242 )
Increase in cash, cash equivalents and restricted cash 4,449,589 5,258,105
Cash, cash equivalents and restricted cash, beginning of period 27,065,423 13,836,771
Cash, cash equivalents and restricted cash, end of period $ 31,515,012 $ 19,094,876
Supplemental cash flow disclosures:
Income taxes paid $ 4,566,000 $ 1,074,025
Interest paid $ 33,885 $ 27,073
Non-cash investing activities:
Change in unproved properties accrued in accounts payable and accrued liabilities $ $ (65,000 )
Change in proved properties accrued in accounts payable and accrued liabilities $ (1,097,247 ) $ 805,443
Change in gathering system accrued in accounts payable and accrued liabilities $ 8,554 $ (8,915 )
Change in prepaid drilling costs $ $ 979,358
Asset retirement obligation asset additions and adjustments $ 7,666 $ (29,853 )
Non-cash financing activities:
Change in share buybacks accrued in accounts payable and accrued liabilities $ 598,419 $

EPSILON ENERGY LTD.
Adjusted EBITDA Reconciliation
(All amounts stated in US$)

Three months ended June 30, Six months ended June 30,
2022 2021   2022 2021
Net income $ 10,582,988 $ (485,025 ) $ 16,388,876 $ 2,250,541
Add Back:
Net interest expense (21,200 ) 13,441 (21,102 ) 32,701
Income tax expense 4,019,576 (165,751 ) 6,201,474 978,822
Depreciation, depletion, amortization, and accretion 1,803,739 1,646,094 3,192,958 3,328,954
Stock based compensation expense 194,050 236,041 336,352 438,540
Loss on derivative contracts net of cash received or paid on settlement (940,553 ) 1,735,674 (1,180,377 ) 1,334,533
Foreign currency translation loss (1,071 ) 279 4,331 611
Adjusted EBITDA $ 15,637,529 $ 2,980,753 $ 24,922,512 $ 8,364,702

Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of natural gas and oil properties, (5) non-cash stock compensation expense, (6) gain or loss on derivative contracts net of cash received or paid on settlement, and (7) other income. Adjusted EBITDA is not a measure of financial performance as determined under U.S. GAAP and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity.

Additionally, Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Epsilon has included Adjusted EBITDA as a supplemental disclosure because its management believes that EBITDA provides useful information regarding its ability to service debt and to fund capital expenditures. It further provides investors a helpful measure for comparing operating performance on a “normalized” or recurring basis with the performance of other companies, without giving effect to certain non-cash expenses and other items. This provides management, investors and analysts with comparative information for evaluating the Company in relation to other natural gas and oil companies providing corresponding non-U.S. GAAP financial measures or that have different financing and capital structures or tax rates. These non-U.S. GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with U.S. GAAP.

EPSILON ENERGY LTD.
Free Cash Flow Reconciliation
(All amounts stated in US$)

Three months ended June 30 Six months ended June 30
2022 2021 2022 2021
Net cash provided by operating activities $ 8,059,064 $ 2,408,765 $ 15,762,534 $ 8,033,633
Less: Net cash used in investing activities (Capital Expenditures) (2,120,991 ) (1,161,543 ) (4,981,904 ) (1,712,818 )
Free cash flow $ 5,938,073 $ 1,247,222 $ 10,780,630 $ 6,320,815
Changes in working capital 3,611,896 149,524 2,954,700 (453,685 )
Free cash flow before Changes in Working Capital $ 9,549,969 $ 1,396,746 $ 13,735,330 $ 5,867,130

Epsilon defines Free cash flow (“FCF”) as net cash provided by operating activities in the period minus payments for property and equipment made in the period. FCF is considered a non-GAAP financial measure under the SEC’s rules. Management believes, however, that FCF is an important financial measure for use in evaluating the Company’s financial performance, as it measures our ability to generate additional cash from our business operations. FCF should be considered in addition to, rather than as a substitute for, net income as a measure of our performance or net cash provided by operating activities as a measure of our liquidity. Additionally, our definition of FCF is limited and does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other obligations, payments made for business acquisitions, amounts spent to buy back shares, or pay dividends. Therefore, we believe it is important to view FCF as supplemental to our entire statement of cash flows.